Brick by Brick

Through the lens of a development lender

In this episode…

The non-bank sector accounted for 54% of all lending in the UK Commercial Real Estate market last year, yet most borrowers remain unaware that this sector even exists. Matthew Tucker and Callum Ferguson from Alpha Property Lending discuss the phenomenal growth of non-banks in development finance, and provide the lender’s view on how they assess a funding application, and what they really look for in a borrower.

 

Full transcript of episode here

0:00 Ian:          

Hi all and welcome to Brick by Brick the podcast of the property development industry. My name is Ian Humphreys and I am a co-founder of Brickflow and one of your hosts. Each week we will be speaking to experts and stakeholders from across the property development sector. We will share ideas and advice on how to get ahead of the game as a developer. As well as trends and insights from across the sector. The series is designed for all experience levels, whether you’re just starting out on your property development journey or you are an industry veteran. We will handpick topics with universal appeal so that we can all continue to learn. We would also love you to share the podcast with your development industry network. Our mission through Brickflow and the podcast is to make development finance better. Every year somewhere between a third and a half of all SME property developers sight the lack of finance as the main reason they don’t build more. Its only through raising awareness of the problems that developers face that we will improve. The more people that hear this, the more the industry will pay attention and the better it will become for all of us. So please share as far and wide as you can. We also really want you to join the conversation if you have any suggestions for future topics or guests or thoughts on any of the podcasts, we would love to hear from you. Get in touch through LinkedIn or Facebook or email us at podcast@brickflow.com. I hope you enjoy the show.

 

1:34 Ian:          

Welcome to the show. This week. I’m delighted to welcome Callum Ferguson and Matthew Tucker from Alpha property lending. Now Alpha is probably not a name that all developers know, but they should. They’re well established and well-funded. They’re strong in residential and development finance, but also in the commercial sector, both for development and investment finance. Let’s find out a bit more about them. Welcome to the show Callum and Matthew.

 

1:58 Matthew:

Hi, thanks for having us.

 

2:00 Callum:    

Morning Ian, thank you very much.

 

2:02 Ian:          

Thanks for coming, guys. So, we want to start the show with you introducing yourself, tell us a bit about your background. Why do you love what you do? Do you love what you do? Callum?

 

2:10 Callum:    

The answer is I started out in the property sector when I studied urban land economics up at Sheffield, so a mix of real estate and economics. Then had a slight hiatus in the financial crash and went out to coach football in California. Then follow my passion, and started my real estate career in 2010, in London. Then a couple of different roles including sort of, land acquisitions, office acquisitions, and also as a JV equity funder prior to joining Alpha, in 2019. At Alpha we’re predominantly responsible for cradle to grave, for loan origination, all the way through to repayment. So, we find the deals, structure them, monitor them and take them all the way through to hopefully a successful end.

 

3:03 Ian:          

Perfect, thank you. And thank you, Matthew.

 

3:08 Matthew:

Yeah, so I’m a lending director at Alpha property lending. So same as Callum, full cradle to grave, for origination, loan management and repayment at the end. I’ve been doing that for the last four years with Alpha. Prior to that, I worked at BLME, which is a one of the challenger banks, which many people haven’t heard of, but they are a Shariah compliant lender based in the city. And prior to that, I was working in both roles, including doing town planning, straight out of university. So, I did that for a few years as well. And that sort of gave me a bit of a grounding in some of other aspects of property, in terms of why we do it. What we like about it, I think. I can’t speak for Callum, but it’s the people, really, it’s everything. It’s all the people that you meet in the daily job. Also, having properties in the family for me, my father is a QS, my brother works in construction as well. Some of my memories as a child were being taken to building sites as well. So, it’s something that’s always been present in my life. So I was always gonna wind up here sooner or later.

 

4:22 Callum:    

There’s also a feeling of legacy with property development particularly you know, seeing a patch of ground or a derelict building turn into brand-new apartments or somewhere where people go to work or trade. You get that feeling of legacy, however small the apartment.

 

4:37 Ian:          

Yeah, I 100% agree with that. I think for me, it’s definitely the people as well. But nothing, nothings the same, no deals the same, no persons the same, how they got there, how they become a property developer, and is always really interesting to me, because, no one leaves school to be a property developer. And you kind of find your way there. And everyone’s path is different. So it’s really interesting. I think he hit the nail on the head there with the people.

Okay, so we know more about you now, can you tell us a bit more about Alpha? You’re not a bank, you’re part of what we call the non-bank lending sector. So how are you funded? How is, how big is the loan book and what are the types of deals that you do?

 

5:20 Callum:    

Yeah, so Alpha is funded through two strains, really we’re a mixture of institutional capital and funds that are raised through a network of IFA’s. So, the important thing about Alpha is that all of our capital is in house. So, we make decisions on how that capital is spent. We don’t have to make cash calls with other lenders or, or anything like that. So we’re 100% an in-house sort of organisation and lender.

 

5:49 Ian:          

You’re in control of your own destiny then.

 

5:49 Callum:    

Absolutely.

 

5:54 Matthew:

In terms of the loan book itself, its currently stands at about 350 million, which has seen a steady growth period over the last sort of, five years. And that’s starting to get to the point where we’re seeing some of those earlier loans repay. We’re having more loans come in as well. We’re getting that churn now, to a point where we’re starting to feel quite established, I’d say of 350 mil, probably about 80% is in development finance, 20% is investment finance, coming in from offices, sheds, care homes, hotels, everything like that. I think in the future, we might seek to balance that out a bit.

 

6:34 Callum:    

Yeah, absolutely, I think over the next 12 months or so we’re certainly looking to grow the book by, circa 15 to 20%. Across, the various different sectors that we are working in already. We try to caveat that with the unusual times we’re currently living in and all communication’s via zoom. Rather than via coffee shop. That’s certainly the desire for the business to drive.

 

6:59 Ian:          

Perfect, okay. Just to put that into context of for people listening or watching, you know, another 20% on 350 million, puts you close to 400 million. There’s quite a few challenger banks that wish they had that kind of size loan book. So, I mean, you are a really serious player in the development finance space.

 

7:22 Callum:    

Yeah, absolutely. I think Alpha, the sort of mantra is that we really are a relationship lender, we want to repeat deals with, the same customers, with the same institutions, the same partners, one after another. So we really want to be here for the long term, we’re not trying to, take over the development loan market in two years and be a flash in the pan, and then go down a blaze of glory. We really want to be here for the long term and sort of build those long-lasting relationships. The non-bank sector is something that really exploded over the last financial crisis, with the constraints put on the traditional high street lenders, in regard to real estate development, it just wasn’t serving the needs of property developers at all. So, this challenger bank and alternative lender sector is really, really gathered pace. So now you’ve got people who are getting funding lines from all sorts of weird and wonderful places. And it’s really showed a bit of innovative, thinking in a sector that has always been, predominantly on the spreadsheets and abacuses. And being from somewhere, that’s been a kind of a peer to peer equity partner previously. It’s really amazing now that the sort of variety of ways people can find a way to service the capital stack but forgot the development.

 

8:44 Ian:          

Yeah, there’s plenty of choice out there. And I think innovation is key. I think people really have jumped into the space that was left by the banks, that’s the growth of the non-bank. The non-bank sector is one that’s fascinating to me. For those listening when we speak about the non-bank sector, we’re typically referring to institutional capital from pension funds, insurance companies, sometimes sovereign wealth, as well as family offices. If you look back to 2008, the data seems to suggest that all commercial real estate deals in the UK were only done by the big banks, by the names that we all know. Whereas in 2019, according to Cass Business School 54% of all commercial real estate lending in the UK was done by non-banks, which is why it’s really important to not just speak to the well-known high street lenders. Technically they are now a minority in this space. If you only speak with high street lenders, then you are actually only speaking to less than half the market, to put some numbers to this achievement by non-banks. In 2019, the UK commercial real estate space was around 65 billion of lending and that’s across bridging development and commercial investment to 54 percent, is circa 35 billion. We’re talking zero in 2008, to 35 billion annually in a little over 10 years. And that’s a huge shift away from the major banks. What do you guys put this down to? Instead of being deliberate? The banks actually retracted. How do you think these newer lenders will fare going into a downturn as well, most of them have only known the good times, economic expansion?

 

10:33 Matt:     

Well I’ll take just the first part of that. And where does this come from? There have been some massive capital constraints on the main High Street lenders. And it’s fair to say that it is not necessarily that they don’t want to lend. It’s more that there are so many restrictions that they can’t always lend on the things they want to lend on. So that’s sort of one element. That means that there’s been an opening in the sector for challenger banks to come in and we see that, we all know who those main players are. Alongside that there’s also an increasing desire for gearing that perhaps has been, again, this sort of retreat from that sector, from the usual sources. When you’ve got challengers stepping in, you’ve also got other elements of the non-bank sector. So, mezzanine lenders, for example, or we’re seeing a lot of third-party equity providers as well, able to help give that extra leg up, that extra bit of gearing that might make the difference between making a deal profitable or just completely unachievable. So that’s the first element. In terms of how those lenders are going to fare going into a downturn. I don’t want to sit here and say, we are definitely ploughing straight into it. Now, just with everything that’s going on in the white market at the moment, and obviously we’ll talk about that later. But it’s about being conservatively prepared in the first place, we try not to lend money willy nilly, we’re not just desperately trying to build a book to 350 million. We didn’t just go out and say, right, we’re going to write every single ticket we can. And there are certain sectors which are very difficult to lend into, and they are very good reasons for that. You don’t want to have been piling money after 2014 into high end London rezi, for example, might not be something where you want to be going up to the traditional levels of 60 65% loan to GDP.  How are non-bank lenders going to fare now will depend entirely on how they’ve prepared over the course of the last few years. For those that have been trying to lend to the right clients, right deals and the right sectors. They should be adequately prepared going forwards. For, the other sectors, those who have been trying to aggressively bulk build, we can expect to see those, funds stepping back from the market, maybe having a rethink about how they want to tackle things going forwards. And in some cases, pulling it all together, we’ve already seen that with various peer to peer lenders as well over the course of the last 12 months, way before COVID-19 struck. So there’s definitely a shift that’s going on anyway, and that’s really almost like a life cycle, you will have those lenders which are inadequately prepared when things go wrong. And they will have to step back. And unfortunately, the people who get hurt when that happens are those who invest in them on the peer to peer side, as people paying their money in and borrowing from them. And it’s unfortunate, but that that is probably what’s going to happen.

 

13:54 Callum:  

Absolutely. I think with the number of different capital we’ve seen come in post 2008 and post, people just going to High Street for their loans, are those people who have invested always wants to get their money back, which is the golden rule. So if we do go into a downturn, then people will be put off, investing in real estate development again, or will be, a little bit more serious about choosing their timing, and it may be difficult to access as much capital as previously. But the flip side of that is that money in the bank is extremely cheap right now. So if you can protect your investors capital, at least during this sort of period of uncertainty. There will be those who have survived, who will be, really in a good place to build going forward. Because everyone is going to be sensible, knowing that things are going to take longer now. So if you can take the steps, protect your investors capital, and make sure that no one’s losing the shirt off their back. I think there will be a really strong opportunity for the sector. Once we get through this, a hopefully short blip in in the current market.

 

15:07 Ian:        

I’ve seen a bit you’re absolutely right. If the lenders that have the higher cost of capital and have been having to chase higher risk in the last couple of years to build a book, are definitely the ones to get out and become unstuck now, and I think, consolidations probably on the cards with some lenders. And I totally agree with your point, Callum, I think, those that come through this and come through it well, will definitely profit going forward. 

Okay, so, moving on. Can you share the type of deal you’re looking for as a lender? What would your ideal deals and ideal clients look like?

 

15:52 Matthew:           

I don’t think you can have the ideal deal, without having the ideal clients. It’s pretty much a relationship industry. Building on what Callum said a moment ago, about how those who come through this will be well positioned to capitalise going forwards. The banks and the lenders who look after their clients, are the ones who will have those clients when the time comes, when those deals are there to be done. Whereas the banks that step back now, won’t have the clients when the time comes, it’s kind of common sense, really. With that in mind, we don’t really want to be working with people who are new to a given sector. If we’ve got someone who brings us a residential development transaction, for example. We’d like to see that they’ve done a few already. And the reason they’re coming to us is because they want to build a relationship with someone who can stand behind them. We’ve got clients that we’re doing a third, fourth, fifth deal with because we don’t want to just do one deal and then move on. Because there’s no merit in that, we want to be here for some time to come yet. And the only way we’re going to do that is by lending repeatedly to the same people. That doesn’t mean that we can’t accept new business coming in, it just means that if we are looking to do a deal with someone, we don’t just want it to be that flash in the pan, that first one and then they’re off to do something somewhere else, more exciting. We want to be doing, very boring, just everyday transactions where we know that we can get that repeat business again and again. For example, if it was residential, 20 apartments in a block somewhere, all Help to Buy, all going to sell very easily to first time buyers. Perfect. That’s lovely. But can we do one of those, and then we’ll fund your next one, then we’ll fund your next one, and so on and so on and so on. And we hope that in that way, we can assist a property developer to grow in their ambitions as well. But on a very organic level, rather than jumping from doing householder extension, to doing that 20-apartment block to then doing 300 houses somewhere. So it has to be more of a steady growth. Really?

 

18:15 Ian:        

Yeah, I think we sometimes people see people that have done a loft extension and now want to build 10 houses. And it’s not quite the same thing. I think the gradual building brick by brick, is the way to return to.

Okay, I can vouch that you’re very much relationship driven lender, and what do you think sets yourself apart, apart from the relationship with clients, because a lot of lenders will probably try and use that. Is there other things that people might think, Alpha are the best people for this, this is their USP?

 

19:05 Callum:  

Well, what we mentioned earlier, in the sense that all decisions are made within the four walls of Alpha, with us we don’t have to go out to external boards or anything like that. So, we can get a gauge on whether a transaction is going to be, four hours to pursue, quite quickly. That’s not to say our credit process is slapdash. We’re absolutely, and I’m sure Matthew can attest,  some of the credit committee’s got a little bit feisty, but we can get that we can get buy in from the main decision makers or not very quickly, and that allows us to zone in on the right transaction with the right people quite early on. Of course, some things are not always what they seem, but that’s part and parcel of the industry, and I think we talked a lot about the challenger bank sector and this sort of having to change. We are very much in the alternative lending space but we kind of want to flip it back to the old school bank manager relationship where you can pick up the phone so your relationship manager at Alpha and that’s the person that you deal with no matter what stage you’re in, not put off to portfolio management or to another team who haven’t met you before, to go through the construction stage, we are they’re all the way through and that way we can hopefully work together to come over any problems that arise or to get on to the next deal. It’s all going back to the old school principals of banking, whilst filling the alternative space.

 

20:42 Matthew:           

That’s something I completely agree with. Something we’ve been quite keen to do is to make sure that, when you pick up the phone and you phone me or your phone Callum or anyone on the team, that’s the person that you end up speaking to, you don’t go to a call centre, you don’t go to a middle management, low management area or something like that. It comes straight to us, and we can then deal with whatever that query is hopefully fairly quickly. So that’s one of the key things. Another part of that, is that because we are all making decisions in house as well, we can make decisions very quickly. We have in the past turns deals around from first approach to getting the money out the door, within, I hesitate to say this. We’ve done it within 10 working days. That’s not an advert. We don’t like doing it that timescale.

 

21:30 Ian:        

Yeah, that’s phenomenal. To be able turn around that workload in that time.

 

21:36 Matthew:           

I should caveat that. A typical turnaround for us would be sort of three to four weeks, that would be normal. That gives us time to go through all the due diligence and to do everything properly.

 

21:51 Ian:        

That’s still really quick by industry standards.

 

21:53 Matthew:           

But if we do need to drop everything else and get it done, we can, we would just rather not.

 

22:01 Ian:        

So the headline is 10 day development.

 

22:04 Callum:  

All 10 day requires to be forwarded to Matthew Tucker.

 

22:10 Matthew: Its going to be a busy 12 months isn’t it.

 

22:18 Ian:        

So, where do you think there’s flexibility in your lending criteria? And conversely, where do you think your perhaps more rigid?

 

22:22 Callum:  

Sectors where we’re quite flexible on at the moment, we look at industrial office, care homes, that sort of thing. Personal guarantees, we can potentially take a view on as well, depending on the client, the situation. I think we always look at the landing package as a whole package. So if one area doesn’t hit the specifics, then we can maybe compensate elsewhere. The things I wear no go really is we don’t lend to retail at the moment. Also what we don’t like is micro unit, some of the things that have gone up in Croydon over the last few years and areas like that have units that, studio micro apartments that have difficulty of mortgage markets. They have at the right time sold very quickly, but it’s not really something we want to be involved in, we prefer to have a good unit mix. So micro units is always a no go. And one of our golden rules is that we always like the developer or the borrower to have 10% of total costs in the deal out of their own pocket. To have that, that skin in the game that cash to, to protect, because really, the borrower is the most important thing in all of this. The real estate is obviously important, but you’ve got to be in bed with people you trust.

 

23:55 Matthew:           

Just to build on that really, if someone has an aversion to offering a personal guarantee we do come across that. But they’re prepared to offer us a charge over or unencumbered property instead. That’s something we can consider. I’ve even seen people try to reduce the value of their personal guarantee by offering cash on account. That doesn’t work for everybody and I can understand why many people would sort of go, why on earth would you do that? And it works.

 

24:28 Ian:        

For some it just works conceptually.

 

24:29 Matthew:

Yeah exactly. It’s really just what it needs to get over the line, like Callum says we’re trying to do the deal in the round, and then find a way to make it work. Rather than say oh, well if you can’t do that, then we can’t lend, because. It’s just not really constructive. It’s not conducive to getting work done.

 

24:47 Ian:        

I think that’s exactly the right attitude to take. I think that gives a really good overview of your offering. I now want to speak a bit about the current development market. I don’t want to dwell too much on Coronavirus. I think we all hope that it’s a temporary thing. But undoubtedly, it’s going to have some immediate ramifications, as well as some long-lasting impact. And how do you see the market playing out over the next six months? But more importantly, once we’re through, what do you think the next few years hold for property developers?

 

25:20 Matthew:

Yeah, I don’t think anyone can have a conversation now without sort of mentioning COVID-19, unfortunately. Nobody’s got a crystal ball. We don’t know what’s going to happen in certainly in the in the short to medium term. And I think there are plenty of market commentators out there who are giving their opinions on it. But at the moment, really, it is just opinion, as we record this, we don’t actually have a roadmap yet, obviously that’s going to change this weekend. So it could change everything where we’re saying now. Over the the medium to long term, we will have a housing shortage in this country until we start building huge numbers of houses and I’m loosening up the planning system to go with it. At the moment we have a very supportive government, even allowing construction workers to go to site at the moment controversially with Coronavirus rampaging through the land as it is anyway. So it’s good to see that we have a we have support in that sense. We’ve also got help to buy. And I know that there’s a lot of controversy around that at the moment, whether that’s can be extended or amended. And we’ll just have to wait and see what happens on that front as well. But it’s quite clear that at policy level there is an acceptance that there is a need to build and there is a need to provide housing for our population. So what does that mean for developers? I think it means that whilst there will always be that demand, we are certainly seeing a flight to quality, we’re seeing that purchasers expect something extra when they’re buying whether that is a car parking space, whether that’s a patio, a winter garden, we’re seeing quite a lot of that in Central London developments as well. They’re expecting that little bit extra to make it different to give it some character. And I think that’s, that’s probably only a good thing. It means that there’s better quality developments coming online. If you were a developer right now and trying to think well, how can I use that to my advantage? or What should I be thinking about? Some of the things that we’re starting to see is people building in bigger contingencies into their construction, just to cater for some of the variations that might be required as a construction unfolds. But that has a knock-on effect because it means that if that cost is going up, then obviously that profit is being eroded. So I expect to see over the course of the next 12 months, a lot more aggression in terms of trying to drive down the prices of the land in first place just to try and get to the point where that profit is still as safe as it can be. And so we might see a change in in that sense as the profitability goes out of the land pricing, or maybe just some improvements in terms of the planning. We’re also seeing a lot of airspace developments as well. Again, a lot of people have mixed views and mixed feelings about. There’s gonna be some changes in that sense as well.

 

28:26 Callum:  

Absolutely, I think you may say from a residential development standpoint, maybe more overages being used, in terms of acquisition price. So to be able to protect the value should development succeed, whereas making it viable from a starting point in a less favourable market conditions. You may see that more commonplace. More creative ways of completing acquisitions. There may be less hanker to live in the city now, as long as we can remember it recent times particularly, hate the word because I am one, millennial generation wants to be, close to everything so they can pick up avocados in the market and go home, and be close to the office. That may change with this current pandemic. There may be people want to work outside the cities more. We’ll have to wait to see how transport and different things evolve around that. But certainly, I think you will see more people wanting to live out in the country as a house. Alpha, we’re looking to move, into sort of some of the core areas we think are great for residential development, like the southwest of the country, you know, Southeast, areas around the Midlands, where people will want to go and live, to get that extra space and with technology that we’re using now, I think, you don’t have to be living in Shoreditch to work in the tech industry. If you can be somewhere else. So that may change. We have also been looking, to diversify our book in house. We do see the residential development as our bread and butter. But I think, certain other sectors will flourish out of this as well. Industrials, warehouses or sheds whatever you want to call them. You know, we’ve got some we’re funding at the moment in East Anglia, they’re going very well. I think that’s going to be something where more and more footfall will move away from the high street into online shopping. More than ever and those will need places to be stored. So that will undoubtedly happen. And there’ll be some casualties as well. I think, the retail is really struggling. I think that will be offset by the growth in other sectors and interests. Really interesting to see how the office set to look after this, I think you may see a move away from highly dense CBD’s and maybe some more regional offices and a more piloted space which have all been turned into permitted developments in the past 10 years or so. So that will be a real opportunity for people as well.

 

31:26 Ian:        

Yeah. I think the advent of technology is interesting, and this is only put it to the fore more. I think that there are a lot of people that are perhaps working more traditional industries where they think that everyone needs to be an office all day every day for the company to work. And I think this period of time has probably shown everyone actually, that you can work from home and pretty much everyone I speak to, is enjoying the pace of life a bit more at the moment. It’s a bit frustrating perhaps. You can’t sit face to face with people and there are some downsides to it. But they’re not sitting on a train for an hour, two hours every day, like some people have to is probably a huge, huge win to mean that they can see more of their kids and spend more time at home. So I think longer weekends, people sort of perhaps only coming into town, Tuesday, Wednesday, Thursday, or maybe, even less frequently, in which case, you don’t mind living in Somerset and commuting to London if it’s only going to be once or twice a week. I think there’s some huge, huge shift in thinking in the way that we use our space.

 

32:42 Callum:  

Absolutely. I don’t think we’ve certainly seen that the death of the office by any stretch, I think this, period will make people hanker after it. You’re right, that habits, will change, somewhat undoubtedly, because of the solutions. Even people like Matthew I certainly, very much in the office kind of people, using this. It’s a force to learn to work from home properly and effectively in this period. And it can, really be a positive for everyone.

 

33:15 Matthew:           

Yes, I was reading something recently said that post 911, there was a flight away from cities from those who could, to move into the countryside. And there was a bump in property prices as a result in the home counties, and that the typical sort of commuter areas you would expect. And one of the things is going to happen here is obviously that sort of petered out, and then Callum mentioned a moment ago, the impact of the millennials wanting to come back into cities for various reasons, mostly to do with just convenience. And I think what we’ve seen here is that everybody’s had sort of having to work from home and people are going to be saying at the moment, maybe my home isn’t big enough. Maybe working from home doesn’t work for me here, but it might work 20 miles down the road 40 miles down the road, whatever it happens to be, where I can actually have a bit more space, a garden for the kids or a spare room I can use as an office or whatever it happens to be. So I think once we sort of saw that little jump after 911, with the Coronavirus we have at the moment, what we might see is a more pronounced spike and possibly with a longer tail on it as well actually having more of an impact over a longer period.

 

34:28 Ian:        

Yeah, I agree. As a lender, if somebody comes to you and says, we’re building,  2 really big houses in the middle of nowhere, obviously less liquid, but based on what you were talking there, that could be a trend, do you think that’s something you’d be willing the support, or do you think you’d actually want to see plays out?

 

34:53 Matthew:          

I think it depends what you mean by a really big house. I think we have funded things where we’ve had sort of a terraced or semi-detached houses, selling at the right price for the market in a strong outside of London, that sort of thing could work. But if you’re just saying I’m building two large, detached houses in the middle of nowhere, and there’s no established market, but we reckon people are gonna come here. Then that’s not going to work, there are other lenders who are going to take that risk.

 

35:33 Ian:        

Im sure there are, if they’re still standing. Okay, one thing we always like to ask lenders, if there’s one thing you could ask your borrowers to do every time when they apply for finance. What would it be? Perhaps one from each of you.

 

35:46 Callum:  

I think for me the bugbear that really gets me is people saying that they want to borrow a certain amount to build something but then don’t tell me how long they think it’s going to take and forget that the money has a time value. I need to know, how long do you think it’s going to take to build it? How long do you think it’s going to take? How long do you think it’s going to take to mobilise first, then how long is going to take to build it? Then how long do you think it’s going to actually take to sell it? And that last part is so crucial? And people come to me and say, well, I recon I can sell, this is an example from earlier that took 20 od flats in three months. And you think, okay? But how, what’s your strategy? How do you intend to do that it’s going to be a bulk sale? Do you have someone that you sell to regularly? Or do you have someone lined up to step in, what do you intend to do? We’re not asking for pre sales. We’re not asking for a detailed strategy, but just to have some ideas and thoughts have gone into how you’re going to sell them at the end. And also, if that construction period does get stretched out, which I think we’re going to see a lot more, we are already seeing shortages of materials and labour. What’s going to happen if you overrun by two months, three months, six months, and some cases it’s not that unusual. You know, if you’re going to come back to us and say, okay, well, look, I’m going to need to extend, you should be thinking from the outset, what that cost is going to look like for that additional cost of money. Because that does have a cost implication, it does mean that your profit is going to be eroded further in terms of finance costs, and if that makes a deal unviable, if that’s the difference between yes or no, it’s a hell of a risk to take. And we have seen schemes where profit has been slowly eroded until actually, there’s very little left for the developer at the end of the project. And that is a real pity. That’s not something you ever want to be involved with.

 

37:39 Ian:        

Yeah, I think some developers, don’t seem to understand the time differential that it has on the day one landline. So, as you just alluded to, they say to you, that we want this amount of money. And you ask how long is it going to take build, and they say 15 months and you say, well I can’t give you this amount of money. Oh, I can build it in 12 months. And its kind of, oh yeah ill shorten the build term so I can get a bit more money. And they say it never a good play. I kind of feel it’s a bit like blind date, one from you, one from you, you Callum.

 

38:29 Callum:  

Thanks Graham, yeah. I think transparency for me, is the most important thing with regard to the developer. We really are kind of warts and all organisation as far as that sounds, you really look at everything, as clearly as we can. And if there is a problem, we can usually find a way around it if  the fundamentals of the transaction and the borrower good enough, you’d be amazed the amount of inquiries we get where, within two days, we’ve had a quick search and found, adverse financial history on people. And if we’re not told, it really does make it, somebody we don’t want to deal with. Whereas if someone comes to us and says, I had a real terrible time in 2008, with the rug under me, and I’ve got this bankruptcy on file, but it was because of XYZ and we collaborate that. We have lent to those kinds of people; we’ve had to charge a bit more to compensate for the risk. But we have lent to those people, and got them going again. So it’s really about coming with, transparent, what are the issues? What are the potential pitfalls, and how can we mitigate those, and we can do that together, collaboratively. And that really is the way we see things moving forward. And that, through the whole transaction, not just through the credit process, that’s how we like to try and do things. There’s nothing worse in property development than people going quiet or leaving the bad news till the last minute. Because, more often than not that means that that’s the final nail in the coffin. Whereas if, things come up, always, that’s part of like those wonderful spreadsheets that we make at the start. It never goes exactly how I pointed out, we all know that. But I think, that sort of open, honest approach so we can hopefully work together and tap into all of our expertise to sort of get a successful outcome is what we look for. And that’s, for me, the biggest, the biggest thing for people coming to Alpha is just, give it to us straight.

 

40:50 Matthew:           

Just to quickly say I think both of these points, they come back to the same thing, which is risk, if we can understand as many of the risks as possible. From the outset, we can give you the best possible terms going through, if any of these things, we have to find them out ourselves, it adds an extra layer of risk, which I think a lot of people don’t necessarily always understand.

 

41:13 Ian:        

Yeah, I think from my side, it’s amazing how often you see it, and kind of how naive some people can be, that they think in a day and age where I can just google your name, and five seconds later, I know most of what I need to know about you. And then they still sort of hold these things back. And it is quite incredible, as you say, a companies house search, a credit search, a Google search. Now you get a pretty, pretty strong understanding and know a lot about your background. And I think you’re right, it sets you off on the wrong journey. If as a lender, if you gave people half the story about what they needed to provide or that we should be able to do a rate for it. And then, two weeks later you changed it, the borrower would be rightly annoyed. Similarly, you should expect the same courtesy that when they come to you, they should say warts and all so there is no surprises. So okay, so one final thing I wanted to ask you both about and it’s really about technology in the sector. And so as you know, through Brickflow, our main reason for being is to, is to try and introduce more technology into the sector, into development finance and RE more widely. But when you compare it to other finance sectors, it doesn’t really seem to have changed in the last 20 years. So from an application and process standpoint, is still very slow. There’s no real adoption of technology. I mean, where do you think there are some quick wins to beat the status quo as it were?

 

43:09 Matthew:  

Well, one of the things that we like about your model Ian is that because you do have that AI that sort of sifts through the models and sifts through the deals to try and get the right client with the right funder, the stuff we tend to see from you means that we’re more likely to take it forwards because we know if we get a deal from you, we know that is gone through that first level, that first tier, will it really fit. So that cuts down firstly, on a lot of time from our side, but also a lot of effort because we have to go through these things quite carefully. And we know we’ve got something from you where it’s been through your model, and that really does help. In terms of the actual IT side of things. You touched on it a moment ago, we can very quickly with a Google search with a Credit search with whatever it is we can get everything we need to know about a borrower. And if there is something that we’re not being told we’re gonna find it out very quickly. So there are things that are going on behind the scenes in that sense, where I think some people can’t really see the wood for the trees, I don’t really think you can always have an AI system or a technology system for having a bank application for a loan. It’ll get you so far, it’ll capture the main detail. But you’ve always got to have a point where you sit down with somebody across the table, you look at each other, and you say, right, do I feel comfortable lending you the money? And I think that that’s the point that the technology, I don’t think there’s, in the near future at least, we’ll ever be able to get to that level of, being able to get that, not feeling it’s much more than that. It’s putting all of that information together and saying right, now we’ve got all the info, do we still feel comfortable lending and that’s something that I think is a challenge for the sector. It’s something that necessarily has to come about with experience. And it’s, a difficult thing to capture.

 

45:11 Callum:  

Absolutely. I think from a map you’re absolutely right. On that point, I think what we touched on earlier with the alternative banking sector, the problem with that is for building any AI model that’s going to encompass the whole thing is that every Tom Dick and Harry is funded in a different way, has a different return on their money. Capital has different appetite. So you can never put something all-encompassing in, what we need to do is get to the point where we’re sitting down and having those, looking in the whites of the eyes, it’s something that we want to do and what we’ve seen thus far, I think, certain things that you sent me in the past with, like videos of site that can save us 2 days from going out to a site. Google Earth is great, but it might not been updated since 2016. And there might be someone growing weed across the road. You don’t want to know or you might want to know have videos. That sort of thing can really save some of the legwork. We have to go there anyway. But it’s, all about getting as much of last auctioned off at the right point. The great thing about property and, the thing that will always hold it back, technology wise, is that it is a people and an opportunity based, industry, and that’s partly why we love it, but also it does have some certain quirks, and I think the rise of the alternative lender, is partly because the banks went to a system where a computer said no, they didn’t lend. It’s trying to find that balance. Undoubtedly, it’s starting to happen and the more detail and the more that first sift of information is going out to the various different lenders should help them, speed up the process.  I think we’re a long way from automated decision.

 

47:21 Ian:        

I agree. I think for us, the way we’ve used it is, it might be with you guys or one of the other lenders on the platform, and I knows a lot of them kind of agree with the numbers. They seem to think that for everyone application that they sanctioned, that they do down on, they’ve probably seen another nine that they hadn’t, so they have a 1 in 10 hit rate. And I think the approach we’re trying to take is a bit like you touched on Matthew, that when an inquiry gets to you instead of it being a 1 in 10, hopefully it’s more like a 1 in 2. And, there’s just those, extra layers, or the extra process has been done at our level. So that by the time it comes to you can really just concentrate on being a bit more granular on the comps and then the detail and also the people. So I think you’re right, it’s a sector that’s never going to be fully automated. I think there’s definitely huge amounts of technology out there that are available in other sectors that we just simply don’t do. And we’ll make all our lives a lot easier. And it would make the experience better for everyone as well. I think we could all be a lot more efficient. But it is, a slow process. But again, hopefully this current situation might speed some of the things up as well.

 

48:49 Callum:  

I think comparable is something that is ripe for technological improvement. There’s data out there and we certainly as a house haven’t found a way yet to shorten that period of us going through, lots and lots of data. If something comes up that is genuinely as up to date as what’s available, that can plot the sort of recent transactions and actually, put in that mathematical analysis for you. If we were just checking that, that would again, save us a great deal of time. So that’s something. I know there are people, there are various systems out there, and they’re getting better. But that is something that I think would have huge take up from the lender industry particularly. Because it’s so time consuming.

 

49:45 Matthew:           

Just one last point here, and I just want to make. You said about that hit rate going from 1 in 10 to 1 in 2. At the end of the day, and we’re lenders, we’re here to lend money, we want to lend money. And we actually have the cash to lend, so we don’t really want to be wasting time on the nine deals sort of having to say no, no, no. Because we don’t see anything from that, that’s not a productive process. So getting down to that 1 in 2, getting down to the point where actually, we’re spending more time actually focusing on taking a deal through, underwriting it and then getting the money out. That is what we want to be doing. We don’t want to be wasting time with deals having to say; well look it doesn’t work because of this, this, this and this. Some of the people we work with having to say, look I’ve actually told you this, three or four times already, please stop sending me deals. We can’t fund yurts, in outer Mongolia. We only want to fund deals that we can fund. So having that better success rate that better hit rate is absolutely crucial to us. So anything that sort of improves that is also good for us.

 

50:55 Callum:  

Now, another thing that we should probably mention is that we do, we are fond of that piece of technology, called the telephone. Because we’re an alternative, that the SME is a bit quirky, but you can see an angle on it that you could work, we’re always happy to talk through it, before someone else’s spent a lot of time putting together a huge application, something that won’t work. But at the same time, it could be something, that actually, let me go and speak to someone about that and see how we would structure it and feed it back that way. So definitely the human interaction and sometimes the, picking up the phone just to run through things is often the best way to place a deal which you may not have thought of otherwise.

 

51:51 Ian:        

Yeah, I think there’s so many little quirks in development finance, and property development in general. The way it works on the platform is that if somebody comes in and matches to you guys, then from there it is very much still a manual process in that we speak to you, we build the presentations and we get the information over to you, but like say hopefully by the time it gets to you it is something that will definitely happen because we’ve had that conversation and you’ve told us what the weaknesses are we’ve addressed them and then, we get to a situation where you’re happy, the clients happy, and it’s just a lot smoother process. Okay, well, listen, guys, thank you both so much for that. And I think that was really interesting to sort of, get it from your side, learn more about you, as the lender but also a bit more about you guys individually and say what you think’s going on in the industry at the moment. So thank you both. Very much. Look forward to catching up with you soon.

 

53:00 Matthew:

Thanks for having us.

 

53:01 Callum:   

Thank you for having us, absolute pleasure.

 

Outro

53:04 Ian:        

Thank you so much for listening to this episode of Brick by Brick, the podcast for the property development industry. It was really interesting to understand how a non-bank works and to discuss with Callum and Matthew the wider non-banking industry. There have been significant changes to development finance markets since the financial crash. And the non-banking industry has been the main driver I always find it really insightful speaking to lenders in that kind of environment. It helps me understand how they approach lending decisions, which then shapes my thinking review projects. Hopefully this episode will help some of you listening, to think like a lender when you come to doing your next project as well. Anyway, we’ll be back again soon with another episode alongside other industry insiders, sharing their own property journeys, as well as their tips and tricks to help you get ahead in the development industry. If you’ve enjoyed this show, we’d really appreciate it if you would leave us a review and share the podcast with your property industry peers. Until next time, take care.